Looking Beyond Lithium by Nick Hodge | MicroCap Review

From PRINT EDITION MicroCap Review Winter/Spring 2017 Issue

Wednesday, March 08, 2017

Lithium was one of the best-performing commodities of 2016, with spot prices more than doubling from below $10,000 per tonne of lithium carbonate to over $20,000.

The obvious driver is the market for lithium for batteries. Deutsche Bank has forecast global lithium battery manufacturing capacity to quadruple by 2020. Everybody has a smartphone in their pocket nowadays. And electric vehicle sales are forecast to pick up in a dramatic way, so we need an increase in supply of lithium to make all these batteries.

But there's a host of metals and minerals that go along with that beyond lithium alone.

There's more graphite in a lithium battery than there is lithium, since graphite is the main ingredient in battery anodes. Hitachi recently announced that it is quadrupling its lithium battery anode material production capacity by 2020. And China, which produces most of the world’s graphite, has announced that it is starting to build a stockpile that will equate to a 20% increase in graphite demand – a sure sign they see supply woes ahead. Many small and microcap graphite companies are out there. When evaluating them, make sure they can economically get to spherical graphite production, which is needed for batteries. Most of them can’t.

There's also more cobalt in a lithium battery than there is lithium. It’s the main ingredient in the cathode. It’s cobalt that gives the lithium-ion battery the high energy density that allows it to power cell phones and lap tops for long times. Like we’ve already seen with lithium and graphite, look for new cobalt companies popping up this year looking to ride this trend.

And let’s not forget about rare earths, either, which are also needed for today’s hi-tech electronics. That supply is still dominated by China and new supply will eventually need to come online.

We saw a lot of companies run up last year in the initial “lithium mania.” Some of them were up several thousand percent.

These equity gains are being made possible by the price disparity in these strategic metals right now. The lithium price is running up because a supply gap is emerging, and so the commodity price is rising so producers are incentivized to bring more online. You have a situation being created now where dozens of companies are now rushing in and staking claims or consolidating assets wherever they can for lithium, cobalt, graphite, and all of a sudden there's 50 companies traded on the TSXV with lithium in the name.

That's the nature of the mining sector, the ebbs and flows. It comes in cycles. It may be a different metal, but the story's the same. But the gains are always real. Investors who can identify microcap companies early that have the management prowess, dealmaking ability, and capital market experience to “get it done” will be handsomely rewarded.

I don’t think this is going to play out overnight. New mineral supply doesn’t come online imminently. There is permitting, environmental tests, engineering, mine construction, and many more steps that come between listing a company on an exchange and extracting metal from the ground.

Find the companies that are aggressively pursuing a path to bring new lithium, graphite, cobalt, and rare earth supply online – not just a path to market a stock in a hot sector.